Talking in Style With VoIP

In 1876, Alexander Graham Bell conducted the first successful experiment with the telephone by saying those famous words, "Mr. Watson, come here. I want you!" Fast-forward 129 years, and voice over Internet protocol (VoIP) is making that type of traditional phone call one for the history books. Now traditional telecom companies, cable companies, and equipment makers are racing to offer VoIP services to customers.

What is VoIP, you ask? With traditional long-distance service, you pick up the phone and dial the number, and the call is charged on a per-minute basis by your long-distance phone company. With VoIP, the same call is routed over the Internet via a VoIP provider -- similar to an ISP -- thus circumventing your long-distance phone company entirely. The major advantage of VoIP and Internet telephony is that it avoids the tolls charged by ordinary telephone service. So long, long-distance bills.

Although this technology has been around for years, the high-speed Internet connections required for VoIP were not widely available. The long-distance carriers didn't see this coming in the early days, but now it has caught their attention. Privately held Vonage -- which has more than 300,000 subscribers -- is the undisputed king of commercial VoIP providers. But it's unclear how long its reign will last. In a move to keep customers, AT&T (NYSE: T  ) offers its own version of Internet calling while discontinuing traditional long-distance service to residential customers.

Not be left behind, other carriers are vying to jump online (pardon the pun). Verizon (NYSE: VZ  ) and BellSouth (NYSE: BLS  ) have launched VoIP calling services, while SBC Communications (NYSE: SBC  ) will begin selling residential phone services that use the Internet this year. The company is aiming for its existing customers who have broadband access but gave up their landline phones. SBC's entry into the residential VoIP market helps validate industry analysts' projections of about 10 million U.S. homes having a VoIP line by 2010.

The cable companies are also getting up to speed by advertising "triple play" packages of voice, video, and high-speed data service. They hope to close the considerable subscriber lead Vonage once had. More than 200,000 people now get their phone service from cable provider Time Warner (NYSE: TWX  ) , which says it is adding 10,000 new phone subscribers every week. Comcast (Nasdaq: CMCSA  ) recently announced plans to roll out its service later this year.

Not only will the service providers see profits from the switch to Internet-based phone traffic, but also equipment makers such as Sonus Networks (Nasdaq: SONS  ) have seen demand for their products rise sharply. Sonus recently announced a 67% increase in customer traffic from last month on its Internet networks. Recent deals with companies such as Samsung Electronics -- the world's third-largest handset maker -- could make Sonus a successful player in the wireless VoIP market, too.

The future for VoIP is bright. Price will be key in who gets the largest slice of the talking pie. With broadband Internet service growing by 38% over the past year, both the telecom and cable companies will be making the call: "Mr. Customer, come here, I want you!" And for investors, paying attention to this growing industry could result in some interesting opportunities down the road.

Fool contributor Kelvin Taylor likes talking on VoIP but does not own shares of any of the companies mentioned.


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